Why are gas prices rising?

Fuel prices continue to rise By Doreen Muzzi Farm Press Editorial Staff A RECENT 12- to 15-cents per gallon jump in fuel prices has some farmers scurrying to rewrite their 2001 production budgets, and wondering how high fuel prices can rise. According to the Energy Information Administration (EIA) with the U.S. Department of Energy, Gulf Coast prices for unleaded gasoline rose from $1.35 per gallon April 2, to $1.54 per gallon by April 23. An informal survey of Mid-South and Southeast petroleum distributors April 24 found unleaded gasoline prices hovering around $1.57 per gallon and farm diesel prices ranging from a low of $1.01 per gallon to a high of $1.10 per gallon. Fuel prices are expected to remain high throughout the spring and summer months, the government agency reports in its short-term energy outlook. “U.S. crude oil and gasoline inventories are below normal and are expected to remain low through the driving season and into the fall. Therefore, price volatility remains a possibility this summer,” the outlook says. “While there are reasons to believe that summer gasoline costs may not rise much above current levels, some of the same conditions that contributed to sharply rising prices last year are re-appearing this spring, such as low inventories and high crude oil costs." The report continues, “Natural gas in underground storage reached the lowest levels ever recorded by EIA at the end of a heating season on March 31. This development has set the stage for continued high spot and wellhead prices that will be sensitive to variations in summer weather conditions that could lead to high electricity demand and competition for gas needed for storage. Only sharply higher-than-expected production performance, or a sharper-than-anticipated downturn in industrial activity will each continued upward pressure on gas spot prices.” The Oil Price Information Service (OPIS) is reporting new record highs in April for spot prices in the New York, Gulf Coast and Midwestern markets “The price increases during the first weeks of spring have made mincemeat of earlier predictions released by the Energy Information Administration.” “The increases have accelerated recently thanks to expectations that industry data will show another draw down “ the OPIS Energy Group says. May gasoline futures hit a high of $1.091 per gallon before the April 24 opening, which according to the Oil Price Information Service, is just shy of last summer's post Gulf War peak of $1.096 per gallon. The rise is being blamed, at least partly, on to a fire at a California refinery. “When gasoline inventories are ultra-sensitive to any unplanned refinery downtime, any unexpected loss in production is met with an immediate response,” the energy group says. The Energy Information Administration, reports that 43 percent, or roughly half of the price of a gallon of gasoline goes towards the price of crude oil. Of the remainder, 29 percent goes to pay taxes, 11 percent goes to distribution and marketing costs and profits, and 17 percent goes to refining costs and profits. In its April 2001 Short Term Energy Outlook, the Energy Information Administration says, generally tight market conditions that are developing in the face of low stocks and increased demand will keep oil producer margins, and thus consumer prices, relatively high. As one Delta area distributor, who wished not to be quoted, explains, “The switch from making heating oil to making unleaded and diesel fuel was not made soon enough, and refineries are running at very high capacity which leaves very little room for error.” Another Mid-South petroleum company executive says, he believes fuel prices are being affected by market speculators’ beliefs’ that inventory levels are not currently high enough and, because of this, there is a possibility for shortages to occur around the country this summer. He says this “perceived” shortage, combined with low refinery utilization, is causing speculators to run the futures prices up. “In the last twenty years we have had a surplus of energy production. All that excess capacity is now gone, And, while we are currently building eight generator plants in Mississippi, the experts are projecting that in the next 20 years there will need to be 40 generating plants built every year to keep up with the demand for electricity. “If we have a hot summer and the folks who own the generator plants have to use natural gas to produce electricity, it will keep natural gas prices high. The increased use of natural gas to produce electricity instead of allowing it to go into storage for the winter, will likely affect the price of petroleum-based products, including fertilizer,” he says.